Owe The IRS? The Truth Regarding Tax Relief and Reduction

It seems like not one hour goes by without an ad on TV, radio, or the internet about “reducing or eliminating the amount you owe to the IRS”. Many commercials claim they can reduce the amount owed to “by 85%” and so on by negotiating the “best deal possible”.

Let’s face reality. If everyone could fail to file and pay taxes to the federal government and then negotiate a “deal” with the IRS, hardly anyone would file and pay on time. However, when failing to file or omitting significant information from the tax return filing causes a large tax deficiency to be claimed by the IRS, there are certain steps that can be taken to reduce the taxes that the IRS claims in their letter that you owe.

We will explore the options available to a taxpayer when they receive the dreaded IRS letter or worse, notified of a levy or garnishment of wages. Many times, the presentation of additional facts and circumstances can and does reduce the amount on the notice or levy.

As you can see through our discussion of the options available to address the problem of a claim by the IRS, the most important item is the engagement of a tax professional to guide you through the maze of options and paperwork. There are many companies with 800 numbers claiming wonderful resolution of your tax problem.

But would you hire someone over the telephone or internet to represent you if you were charged with a crime? Of course not! You should treat the tax obligation as a serious legal matter that needs a person that you can work with face to face and that has the necessary background, reputation and experience that can be checked into.

Remember, you as the taxpayer are liable for the tax, not your advisors. So get good information and background on your advisors before throwing good money after bad!

Listed below are several common issues.

Failure To File-Provide Information and Reduce the Claim!

When you fail to file your return and the IRS determines from documents of income they have received that you owe taxes, the IRS will file a return for you if after repeated requests you fail to do so yourself. This filing is called a Substitute For Return or SFR for short. Believe me, the SFR only takes into account items of income and the standard deduction and exemption for 1 person if single, 2 if married. No additional items of loss, deductions such as interest and taxes on a home, charitable contribution, or even additional dependents are included in the calculation of the tax (plus penalties and interest of course!).

By simply filing the past due returns utilizing a tax professional with all the proper information and claims for allowable deductions, the taxpayer can significantly reduce the amount the IRS claims is owed! This is how tax reduction companies “reduce” what the IRS claims in many cases, and sometimes this results in a significant reduction!

Even worse, in some cases there has been an OVER PAYMENT of taxes and a refund should have been issued from the government. However, if you fail to file, and there is a refund due, after 3 years the refund is forfeited. While you may not owe taxes as a result of the late filing, you will be very upset that you forfeited your refund from the government. In addition, if you owe tax from other years, you cannot offset the forfeited refund against taxes due from the other returns.

So the first step in any claim by the IRS for a tax liability is —-FILE THE RETURNS!

Filed but failed to report all income (and more importantly deductions)-Notice CP2000!

So you filed your tax returns on your own, or had a “friend” help you. Then you got the IRS letter (sometimes the IRS Notice CP2000) stating you owe a ton of money. What can be done then?

By contacting a tax professional, the return can be reviewed along with the items of income the IRS says was missing from the return. In many cases, the amount was reported on the return, but just not in the proper place the IRS computer was looking for it. For example, Form 1099-MISC for nonemployee compensation was reported on Form 1040 Line 21 rather than Schedule C. By explaining the problem, in many cases the issue can be resolved.

A lot of times the taxpayer has a whole lot of stock transactions resulting from security sales through your broker, that you either—

Failed to report at all or

Reported but did not state the basis (what you paid for the stock when you bought it).

If you fail to report a stock sale, the IRS gets a record of the sale from your broker and if unable to find it on your return, shows the income received with ZERO cost and a big tax liability. By simply filing the proper cost schedule on a corrected return, in many cases the tax liability can be reduced or eliminated, or in some cases due to losses a REFUND claimed!

By correcting the errors through amended returns (Form 1040X) for up to three back tax years, the amount of tax owed can be significantly reduced.

The “Fresh Start” Program-Installment Plans and the Offer in Compromise

The IRS has implemented a “Fresh Start” program. This is not where you get a write off and a “fresh start”! Rather this is a program to pay your taxes off in installment agreements or make an offer to reduce the tax liability by showing your inability to pay the amount in full. Let’s look at each type of program.

Installment Plans-How Much the IRS thinks you can pay each month!

Unlike credit cards, the taxpayer does not get to determine the amount to pay each month to take care of the tax liability. The amount is determined by the IRS looking at all the income and property of the taxpayer to see what can be paid today, and then a payment plan is developed for the future. This is done through a complex analysis of the financial condition of the taxpayer where the assistance of a tax attorney or tax professional is suggested. There are fees involved in the setup of the plan if accepted by the IRS. Further, the current tax return each year is required to be filed timely and paid in full along with the required installment payment. Failure to adhere to the terms of the agreement can result in the whole amount being called and immediately due.

This sounds like the “deal” where you reduce the taxes owed. But the little catch here is what the IRS thinks you can pay, not what you think you can pay. Many offers are rejected because they do not meet the strict IRS criteria for the amount you “offer” for the tax bill. Also, the forms are very complex and ALL ASSETS and LIABILITIES (even the gold coin your Aunt Mary gave you) MUST be reported on the application. In other words, no hidden stuff from the IRS if you own it. In addition, you must agree to stay current on your tax filings and payments with the IRS for the next 5 years if your offer is accepted. If you fail to do so, the tax offer in compromise is voided and the liability reinstated. The process starts all over again!

If you do want to make an offer, you have to submit the form along with the required filing fees and payment with the offer. If the offer is accepted, you will have to pay the balance as agreed in installments or lump sum. Failure to strictly adhere to the terms of the accepted offer will void the offer and cause the entire tax bill to be reinstated.

The criteria for having a successful offer accepted is engaging a tax professional to do the preparation. Failure to submit a properly prepared offer is a waste of time and money in most cases.

Is Bankruptcy the answer?

Sometimes there will be a recommendation for filing bankruptcy in order to eliminate the tax liabilities along with other liabilities. A bankruptcy filing does not AUTOMATICALLY eliminate tax liabilities owed to the IRS. Care must be taken to ensure that the tax liability is discharged in the bankruptcy proceeding if it is qualified to be discharged. Of course, it is strongly recommended that an attorney experienced in bankruptcy be engaged to ensure that the bankruptcy eliminates the tax liability if it is able to do so, along with a tax professional to assist in the identification and elimination of tax liabilities, if possible.

I’ll just wait them out—The 10 year statute of limitations

If you are insolvent and have next to nothing to take (either now or in the future) this may sound attractive. But what if you get an inheritance or other money in future years? The IRS will want to claim their share first! If truly insolvent, it is recommended that the offer in compromise be pursued first, followed by an attempt to set up an installment agreement or being placed in uncollectible status.

A tax professional should be engaged to do a transcript analysis of statute expiration dates.

If the balance due is not collected in 10 years it expires. But the IRS will hotly pursue you in the last few years with demands to “extend the statute” and aggressive tactics to collect as much as possible before the statute expires. So this is not a great approach either.